[The following guest post is contributed by Amitabh Robin Singh, who is an Associate at DSK Legal]
The Securities and Exchange Board of India (“SEBI”) has recently issued a circular (“Circular”) which has allowed companies which have made deemed public offers (allotment of securities to more than 49 persons under the Companies Act, 1956) to escape penal action if the securities have not been allotted to more than 200 persons in a financial year (the threshold for deemed public issues under the Companies Act, 2013). This has been done considering that the threshold for a deemed public offer has increased from not more than 49 persons to not more than 200 persons with the enactment of the Companies Act, 2013.
The Circular applies to companies that have made deemed public issues prior to April 1, 2014, which is the date on which the relevant section (Section 42) and rule (Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014) of the Companies Act, 2013 were brought into force.
Generally companies who make a deemed public offer without complying with the provisions of the then in force Companies Act and extant SEBI guidelines are barred along with their promoters and/or directors by SEBI from accessing the securities market for a particular period of time which is stipulated in the relevant order against the company.
Pursuant to the Circular, an erring company can avoid penal action by giving the holder of the security (if the security has been transferred since allotment, then to the transferee-current holder) an option to surrender the securities at a price not less than the subscription amount plus 15% interest or any such higher return which was promised to the investors.
It is pertinent to note that the term used is “amount of subscription money”. So it appears that if the holder of the security on the date of the refund is a subsequent transferee from the original subscriber, the base refund amount is to be the original subscription price and not the price at which the security was transferred to the current holder. This position seems to be reasonable.
An interesting point to examine here is the catchment area of the Circular. How many companies, which have made deemed public issues prior to April 1, 2014, will be able to benefit from the Circular and avoid penal action?
Upon perusing the last five orders passed (chronologically) in relation to deemed public issues being Amazon Agro Products Limited, Vaibhav Pariwar India Projects Limited, Bharatiya Real Estate Development Limited, Mondal Construction Company Limited and SEBA Real Estate Limited, it can be seen that none of these cases will fall within the purview of the Circular. This is due to the fact that none of the abovementioned companies had allotted securities to between 50 and 200 persons in all of the relevant years in which the concerned security was allotted. The number exceeded 200 in all of the abovementioned cases.
To see an order which would have come under the purview of the Circular, one has to go back to Prayas Projects India Limited, dated December 29, 2015, in which the securities were issued to not more than 200 persons in all of the concerned financial years in which the security was allotted. In this case the securities were allotted to 107 and 47 subscribers in the respective financial years.
From the date of the passing of the Prayas Projects order till date more than ten other orders have been passed on the matter of deemed public issues all of which would not have been benefited by the Circular due to the allottees being more than 200 in number, so it can be seen that cases to which the Circular will give benefit to in the future may not be very commonplace.
The Circular goes on to lay down the procedure for implementing the refund stating that the process which the company undertakes to effect the mandated refund needs to be evidenced by proof of dispatch of the refund. Also, the refund is required to be made through cheques, demand drafts or Internet banking channels to enable the trail of the money to be clearly traced.
The company is also required to submit a certificate from a practicing chartered accountant to certify compliance with the refund process which states that the chartered account has verified all documents relating to the refund such as proof of dispatch of letters and the company’s bank statements, etc.
In conclusion, despite the fact that a good number of companies that have made deemed public issues will not benefit from the Circular, it does not seem to be the intention of SEBI to give such companies an escape from penal action which have mobilized funds from a larger amount of people going beyond the increased threshold ushered in by the Companies Act, 2013. Hence, companies and promoters/and or directors who have made comparatively smaller deemed public issues can avoid being barred from the securities market and continue their involvement in the market.
- Amitabh Robin Singh